Japan's economy dealt blow

March 14, 2011

TOKYO (AP) -- The Bank of Japan stood ready to prop up the financial system amid fears the Tokyo stock market will nose-dive when trading opens today following the disasters that killed thousands and devastated the country's northeast.

Preliminary estimates put repair costs from the earthquake and tsunami in the tens of billions of dollars -- a huge blow for an economy that lost its place as the world's No. 2 to China last year, and was already in a fragile state.

Japan's economy has been ailing for 20 years, barely managing to eke out weak growth between slowdowns, saddled by a massive public debt that, at 200 percent of gross domestic product, is the biggest among industrialized nations.

"In the short term, the market will almost surely suffer and stocks will plunge. People might see an already weakened Japan, overshadowed by a growing China, getting dealt the finishing blow from this quake," said Koetsu Aizawa, economics professor at Saitama University.

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The nation's big-three automakers, meanwhile, said they would halt all production in Japan due to widespread damage to both suppliers and transport networks in the region.

The Bank of Japan pledged to pump more money into financial markets when it holds a policy board meeting today. There is not much left for the central bank to do regarding interest rates, which are already close to zero.

Tens of billions of dollars are expected to be needed to rebuild homes, roads and other infrastructure -- requiring public spending that will add to the national debt.

"The impact on Japan's economy will be devastating," said Sheila Smith, senior fellow for Japan Studies at the Council on Foreign Relations, a New York-based think tank. "The long-term economic blow to a country already struggling to lower its budget deficit ... will be significant."

Noting the 1995 earthquake in Kobe cost $132 billion and was the world's most expensive natural disaster, she said it was too early to say whether the losses from Friday's disaster would be on that massive a scale.

Four nuclear plants were damaged in the temblors, causing widespread power outages. In a frantic effort to prevent meltdowns, nuclear plant operators ruined at least two reactors by pumping sea water into them.

In an unprecedented move for tech-savvy Japan in recent decades, Tokyo Electric Power Co. rolled out blackouts of three hours per day to parts of suburban Tokyo and other cities, starting today.

And Tokyo trains, which usually run like clockwork but stopped for nearly the entire day after the quake, will be on a reduced schedule starting today, to conserve electricity.

"It looks like we are going to be running on reduced electricity for a long time. That is a definite risk to industrial production," said Carl Weinberg, chief economist at New York-based researcher High Frequency Economics.